MISC Berhad (MISC) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. Thank you for participating in our third quarter financial year 2023 Analyst Meeting. I am [ Faizen ] from MISC's Investor Relations team. We have with us today Captain Rajalingam Subramaniam, President and Group CEO; Encik Raja Azlan Shah Bin Raja Azwa, Vice President, Finance and Interim Vice President, Corporate Planning; Encik [ Karuf Ali ], Head, Financial and Statutory Compliance, Group Finance; and Ms. [ Kiran Koh ], General Manager, Corporate Planning. Before we start with the analyst briefing proceedings, I would like to bring your attention to the disclaimer slide. This presentation contains some forward-looking statements with reference to our plans and expectations, whereby actual results could differ due to unknown risks, uncertainties and other factors that are, in many cases, beyond MISC's control. With that, I would like to invite Raja Azlan for his introductory remarks on the quarter's key highlights and business updates.

Thank you, [ Faizen ]. So a very good evening to all the analysts, both from the sales side as well as the buy side. I welcome you again to the third quarter analyst briefing. I will take you all through the highlights, and then I'll pass over to my colleagues to take you through the presentation in greater detail. Insofar as the third quarter highlight, revenue. We are reporting revenue of $726 million, which is an 8% decrease quarter-on-quarter and a 10% decrease year-on-year. Year-to-date, we are reporting about $2.2 billion, which is about 1% decrease compared to year-to-date of 2022. Insofar as the profit after tax, we are reporting a profit after tax of USD 86 million, which is a 23% increase quarter-on-quarter and a 54% decrease year-on-year. However, if we look at the year-to-date results of about $295 million, we are 8% higher as compared to the corresponding year-to-date of 2022. In terms of cash flow from operations, we are reporting USD 294 million of cash flow from operations for the quarter, which is a 48% decrease quarter-on-quarter and also a 22% decrease year-on-year. If we look at the year-to-date results, we have got cash flow from operations of [ $1.19 billion ], which represents about 30% increase compared to the corresponding year-to-date results in 2022. For the quarter results, if we strip off the one-off items, you will see that between the third quarter and second quarter, it's comparable. There were one-off items in the third quarter of 2022 which was a one-off prepayment, which was amounting to [ $50 million in '18 ]. Once we equalize for that and some additional one-off items that we incurred in the quarter, roughly, we would have got a profit of about $130 million for the third quarter of 2023. In terms of other highlights, we are very honored to announce that in the 26th of September, Marine Money has named MISC the winner of the Sustainability-Linked Deal of the Year award for Asia. Just as a recap, we raised a sustainability-linked loan of about $527 million senior secured term loan for 6 of our VLECs. This is a significant impact in the maritime industry while it is also aligned with our strategic priorities for MISC 2030. And also, we are very proud that on the 2nd of November 2023, the Singapore Registry of Ships Forum 2023 has recognized our 2 new LNGCs, the Seri Damai and the Seri Daya, with the prestigious Green Ship status under the Maritime Authority of Singapore Green Ship Programme. Seri Damai and Seri Daya stand as the pioneering vessels fleet to attain Green Ship status, making them the second and third vessel within the group following our dual-fuel very large crude carrier, the Eagle Valence. Let's go to the next slide. Okay. Some other notable updates during this third quarter. On the 20th of August this year, AET delivered its first of 3 new VLCCs, the Eagle Vellore, to Shell. This is a state-of-art crude tanker powered by LNG dual-fuel, liquified LNG gas engines, and it's on a long-term charter to Shell Tankers Singapore. And also on 30th of October 2023, AET delivered its second VLCC, the Eagle Ventura, to Shell. On the 19th of September, MISC entered into a new operatorship agreement with Nissen Kaiun for the sale and charter of 2 existing LNG carriers. It is a strategic transaction for us to unlock value and [ expect ] returns for our gas assets and to basically monetize and also realize returns upfront. On the 22nd of September, MISC signed the term sheet with PETRONAS CCS Ventures as well as Mitsui O.S.K. Lines for a potential incorporation of a JV entity to invest and develop as well as monetize LCO2 carriers. This basically is a strategic initiative under our green energy trust, and we hope that this will yield more opportunities going forward. Also, on the 30th September, MISC secured -- sorry, 30th August, MISC secured an approval in principle from DNV for our innovative floating CO2 storage concept that was jointly developed with Samsung Heavy Industries. And this aligns with our long-term vision of safety, efficiency and sustainably moving energy. Lastly, on the 31st of October, we entered into a heads of agreement with Pengerang LNG Two for the supply and operation and maintenance of an LNG FSU. This also is a strategic initiative to enable the longevity of our LNG steam carriers, and we hope that we will be able to enter into more of these going forward. Next slide, please. This is an update on our Mero-3 project. As at the third quarter, the project has achieved a physical completion of 91.7%. Based on accounting, we are recording about 87% percentage of completion based on the accounting standards. We made good progress during the quarter, and we are on track to sail away during the first quarter of next year. So that is basically an update, and I'll pass over to my colleagues. Firstly, [ Karuf Ali ], who will take us through a bit more detail on our financials. And then after, [ Kiran Koh ], who will take us through some of the strategic updates for the analysts. Please go ahead, [ Karuf ].

Thank you, Raja Azlan and the Investor Relations team. Good evening, ladies and gentlemen. My name is [ Karuf ]. I shall walk you through the financial highlights of MISC Group for the third quarter ended September 2023. The group revenue for Q3 of USD 726 million was lower compared to Q2 this year and Q3 2022, largely due to lower construction revenue from the FSO Mero. This is in line with the current phase of the project, which as explained and briefly mentioned by Raja earlier, is already at the tail end of the construction phase. However, the reduction in this revenue is partially offset by the higher revenue in the Heavy Engineering segment from the new and ongoing projects. Consequently, the group's PBT from operations for the quarter of USD 100 million was also lower than Q3 last year. Apart from the lower revenue and construction gain from the FPSO Mero-3, the decrease was also due to a onetime recognition of competition from contract renegotiations in the Petroleum segment last year, while in this current quarter itself, we have further recognized cost provisions in the Heavy Engineering segment as well as in the OBU, Offshore business segment's costs related to an incident involving one of our assets earlier this year. From a cash flow perspective, we have recorded $294 million adjusted net inflow from operations. This is lower than previous quarters and the review because of the one in close recognized in the respective quarters, as earlier mentioned by Raja Azlan. In Q3 last year, we received that onetime compensation from the contract modification, while in Q2 this year, we have received approximately above $200 million from charter prepayment for our FSU assets, which was announced earlier in Q2 this year. Spring off these onetime payments, we wish to reiterate that, our cash flow from operations in the current quarter would have been comparatively similar to the previous quarter's cash flow from operations. Moving on to our financial position, balance sheet as of September, Page 9 in our deck. We have continued to show strong financial position for the current assets as of September this year of $14.2 billion was comparable to the position at the beginning of the year. However, as shown here, we have improved our gearing ratio of 0.47 to 0.44 due to net repayment of borrowings during the year. Similarly, in [ fixed term ] of the debt, you will also see that our cash balance remained at USD 1.6 billion despite we have net repayment of borrowings during the year, as you see lower level of net debt for MISC Group as of September 2023. Moving on to performance in the core businesses, Page 11 of our deck. The profit from the Gas Assets and Solutions business is comparable with the corresponding quarter as well as Q2 this year. This is largely because the segment profit is underwritten by the segment's long-term on-tax portfolio. In the Petroleum Shipping segment, the segment reported a lower profit compared to Q3 last year. This is, again, due to the onetime proposition recognized last year. Shipping out this onetime gain, the segment performed operationally better on the back of contributions from the new deliveries in the segment since last year. Moving on to the Offshore business segment. In the current quarter, the business recorded lower construction gain and revenue from the FPSO Mero-3, again as I mentioned earlier. And as briefly mentioned, the segment has also recorded certain cost revision related to the asset earlier this year. Last but not least, in the Heavy Engineering segment, despite recognizing higher revenues from the new and ongoing projects. Unfortunately, this segment was affected by the cost provisions that was made by the segment in the current year. Now this concludes my presentation. I'm handing it over to Ms. [ Koh Kiran ], who will walk you through the market environment.

Thank you, [ Karuf ]. So thank you. Good evening, ladies and gentlemen. So thank you for joining us. I shall take you through the market environment for the businesses that we are in. So let me start off with the LNG Shipping segment. The LNG rates are expected to strengthen in quarter 4. In quarter 3, what we saw was rerouting of shipments on longer routes simply because of the geopolitical situation as well as the seasonal demand that has affected the vessel availability in the market. And to add, we have the winter demand that's coming up that will also definitely put up the rates moving forward. So as you can see, the spot rates are currently hovering between 90,000 to 120,000 per day. So this means that for the gas business, we will continue [indiscernible] opportunity in this segment underwritten by the portfolio of long-term [indiscernible]. Also in the LNG segment, what we see is that there is a tight LNG shipping supply expected as project FID's outlook remain bright. But these are also depending on some of the challenges that the segment foresees such as the recession in the U.S., for example, as well as competition and also the funding options. As you know it, it is gaining prominence when we began FID. The 13 new orders only on new ordering has expanded the order book to fleet ratio to above 51%. And the pace of new reordering has been low in comparison to last year's, for example, where we only sold 42 LNGCs ordered in January to August this year. The tight shipbuilding capacity will continue to strengthen newbuild prices, which will retain the speed growth in this segment. We also expect in the LNG segment that new ordering good to be steady, factoring in the Qatar LNGC orders as well as the new export projects and not getting the fleet renewal program that's ongoing. So the shipbuilding capacity remains tight with most of those available after 2027. That's how we see the LNG segment. Moving on to the Petroleum Shipping segment. We have seen a period of softer conditions since last quarter with the average rates declining due to the seasonal demand, as again, it's all based on the autumn refinery maintenance as well as the prices. This has impacted the price to market rate, sorry. So the market is expected to strengthen moving forward from the strong Chinese oil demand, from Atlantic exports, acceleration in refinery runs as well as the seasonal trend for quarter 4. So for this segment, we are continuing to improve the quality of our secured income and balance sheet through our Shell tanker business and asset rejuvenation with dual-fuel shipbuildings -- newbuildings, sorry. Moving on [indiscernible] side. In terms of the utilization, we see that utilization will remain high, seem to be truncated supply. The total fleet is likely to shrink, and this sharp decline will be seen throughout this year and up to next year as well. So despite an increase in new orders for 2023, the order book is still very much weak at just 3.5% of the fleet. So we are seeing no demolition activity in the Petroleum segment as of today as there is a tight tonnage supply currently. As for the Offshore business, Asia Pacific and Latin America will drive the E&P spending for the offshore segment. And this increase in spending is seen in the drilling and well services as well as investments in new technologies. So there will be an upward trend in the higher number of FPSO awards from this positive outlook. So as conclusion, the Offshore segment remains to be positive where oil is still very much relevant, and the demand for FPSO is expected to stay in the next 12 months. With that, thank you.

[Operator Instructions] Firstly, we have Ben Shane from Macquarie.

My first question is just around what we should think of as one-offs, particularly for the Offshore and Heavy Engineering. You mentioned that these were cost provisions. They're probably one-off in nature. Please give us the quantum and whether there will be any more to come in the next quarter.

I mean in the Offshore segment, as my colleague mentioned just now, we had to incur some repair costs relating to an incident that we had in the earlier part of the year. And these costs eventually, we will be claiming insurance for these costs. Those are for the offshore units. In terms of the MHE, there has been some additional movement in the cost of completion for 1 or 2 of the projects, mainly because of cost escalation or price escalation within certain areas such as the marine spread and all that. We believe that we have captured the bulk of these costs. We are focused -- our efforts are focused on the recovery efforts from the client. In addition to that, there was some additional one-off tax provision that we booked in the third quarter given certain notices that we had received from a certain jurisdiction. And for conservative sake, we have booked in certain provisions relating to those notices of assessment. However, we will be working with the industry associations to challenge some of those claims or notices of assessment.

What would the quantum be for these one-offs? Maybe you can talk them through one by one.

For the first item, I think during the quarter, the amount was about USD 20 million. For the MHE additional cost, I think we're just -- we're talking about maybe about MYR 30 million to MYR 40 million movement in the cost of completion, whereas in terms of the additional tax provision which we have key in is probably about USD 10 million to USD 12 million.

Okay. And just checking, I can't remember now, but for your offshore debt, it will not involve any minority interest impact, right? Is that straight to your bottom line?

Correct. Correct. Offshore is straight to the bottom line. But these are things that are covered by insurance. So you will see the recovery coming in next year also. There's no cash flow impact other than the -- we have had to incur the costs this year, and the recovery will come in next year.

Okay. That's clear. My next question is just around your oil tankers. I don't think term to spot ratio was mentioned, or maybe I missed it. But yes, what's the term to spot ratio? And the majority of your fleet now, your spot fleet -- sorry, your trading fleet, right, as opposed to maybe DPST, how much -- when will the charges be rolling over? I just want to understand what pricing you're packed to and when that will change.

For the term to spot ratio, it is now 85% term and 15% spot. In terms of the expiry of the DPST...

Excluding the DPST, sorry.

You're talking about excluding DPST?

Yes.

DPST will be only renewing or expiring in 2027. One of them will be in the latter part of this year, but the remaining 4 will be in 2027.

What about the Aframax that will typically be rotating back to spot? I just want to understand how much of them are still writing on the high rates they locked in earlier this year.

Those are only -- duration is about 1 to 2 years.

Okay. Maybe I'll ask the question differently. Should we expect to see the spot ratio pick up significantly in the coming quarters? And will there be more volatility for your tanker segment as some of these Aframax come off their time charter?

I think we are quite confident that at least 75% of our income is secured. Given that we have now invested in a lot of DPSTs as well as the dual-fuel environmentally friendly assets, we should be seeing at least 75% secured.

Thank you, Ben. Next, we have Mr. Raymond Yap from CGS-CIMB.

Yes. So I have a couple of questions. Let me go one by one. I think for the dividends, I noticed that you dropped the dividends from $0.10 last quarter to $0.07. So I'm a bit confused now. I was expecting the third quarter to be also $0.10. So could you give us some guidance on what's your thinking behind lowering the dividend this quarter? And what do you expect the fourth quarter dividend to be?

I mean last quarter was basically a surprise for the market. And we need to conserve cash as well for our growth going forward. We have got ambition to deploy capital into our green and new energy sector. So therefore, we need to be, I mean, measured in the way that we increase our dividends. I think for now, that's what it is for this quarter.

I would say we may see historical dividend payouts rather than reducing dividends.

Okay. Okay. So I shall treat last quarter as a special surprise for the investors, yes, one-off special surprise. Can I say that?

That's up to you to ask you to decipher. But as an organization, we are responsible in terms of future growth and balancing it with return to shareholders as well. So that's the position that we take.

Okay. In terms of the taxes, which jurisdiction was this that sent you the special tax notice? And also on the shipping tax exemption in Malaysia, it's lasting until end of this year only. What do you think the position of the Malaysian government is going to be going forward?

Yes. On the -- in terms of the jurisdiction, we'd rather not say because we are actually challenging, and we wouldn't want you to write it in your analyst report. So if you don't mind, we wouldn't want to actually reveal which jurisdiction it is. And insofar as the relation shipping tax, we have cited the letter from the MOF and the MOT to say that there is an extension up to 1 [ of the ] 3 years, subject to certain conditions to be met in 2024. So we are happy with that, and we will be working towards -- or the government will be working towards meeting conditions, and we will be assisting them wherever we can. [indiscernible] to the implementation of tonnage tax as soon as possible.

Implementation of tonnage tax. Okay. How does that work relative to income tax?

Tonnage tax is actually the industry standard globally. At all the major shipping relations, they do not charge the corporate income tax. They charge tonnage tax, and tonnage tax is a fraction of corporate income tax.

Okay. So assuming that Malaysia introduces tonnage tax in 2024, how do we calculate that? Is it based on a per [ ton ] basis?

Yes, it's based on the tonnage. I mean you can see in certain other jurisdiction, it is probably 10% of what corporate tax would be.

Okay. So if corporate tax is 24%, then this tonnage tax is probably around 2.4%, yes?

Yes, it's a smaller number.

Okay. Sure. Okay. I already finished my 2 questions, and I have about 10 more to go. So never mind. I will jump back into the queue.

Thank you, Raymond. Thank you. Next, we actually have Ben Shane again. Ben?

No one else was to ask questions, so I'll go again. I want to follow up on what Raymond asked around the dividends. And I want to understand this in a broader sense of your capital management and your CapEx appetite. So firstly, I believe your order book win that you sort of put out there is about USD 1 billion per year. Secondly, you've also pointed out to us that your balance sheet is stronger. And thirdly, you said you have this -- it's not explicitly progressive dividend policy, but you say no worse off than last year. So what I'm trying to understand is, are you saying that you'll increase your CapEx appetite? Or is there something that you're eyeing in the near term that will require more balance sheet commitment from you? Or is it the case that you are just being conservative for longer-term project? And also I just want to be clear, it would be helpful if you can be more explicit on the second quarter dividend that it's not just a special that you will aim to match this next year.

I mean as a listed entity, coming from me, so let's be clear about that. And then as an organization, that historical dividend, we'll be maintaining a certain historical dividend consistently. Our balance sheet is strong. As you would know that in quarter 2, we also had a one-off. That one-off came. And we also balance it in terms of what sort of balancing in terms of future CapEx is and how much value that we can add on to shareholders. So the decisions were a very balanced decision in that light. As far as CapEx is concerned, you also know historically what is our CapEx appetite. And as an organization, we always want to retain a [ fortified ] balance sheet while maintaining our financial ratings, both S&P and Moody's. So to us, that's very critical. So it is an overall balance. At the moment, the team is, of course, prospecting for both conventional CapEx plus also future-focused CapEx in being more environmentally green in our portfolio, right? So that's the balance that we are having. And we would be very careful in our approach, and we will also be looking at how do we balance our CapEx for our conventional business, our new future-focused business, which I've explained to both the buy side and the sell side previously and also in the last quarter. And we stay focused on that progressive journey. So that's where we are. We are balancing overall. That would be our take at this stage.

I appreciate you pointing to the historical track record. It is, of course, difficult to build our forward assumptions on the historical track record, especially when your dividend behavior changed a little bit in the second quarter. But if I may just follow up on that, with your -- again, tying back to short-term sort of expectations on order book wins, right? Is the decision to hold off the CapEx in this quarter more short term or long term in nature? I just want to understand that from a capital management perspective that -- whether it's a bit more short term and reactive or the posture for your capital management is really going to be like this longer term and you may need to have a stronger balance sheet for the green energy transition.

I mean to be perfectly fair to everyone, we did not hold back any CapEx allocation or CapEx spend this quarter for any reason. No, we did not, right? It's just a natural progression. You can see that in some of the slides that the team has put in just now, we have progressively put in and there is CapEx like for our PFLNG-2 in Pengerang. There is the CapEx that is progressing. We cannot dictate the time line of when clients make the CapEx decisions in terms of the bids. So it is just taking a natural progression. It is not holding off, right? We have CapEx every time for the right reasons, and we are prospecting in our conventional business, and we are also prospecting for our future-focused business, especially in the decarbonization field. So that's what the team is doing at the moment. We cannot control the time line of when our clients will make their decisions in the bids that we are putting in.

Thank you. Thank you, Ben. Next, we actually have a question from [ Dalim Sikya ]. And the question that was put through the chat is that, I would like know what is the Mero-3 EPCIC profit for this quarter.

I mean as I mentioned before, for the whole project, it is going to be a low teens construction profit before finance cost. So that is what we have guided, very low teens based on the accounting standards, the way it's calculated.

Thank you, Raja Azlan. Next is Raymond.

Okay. So I wanted to ask a couple of questions about the LNG segment. So 2 LNG vessels were disposed to Nissen Kaiun, and you're going to lease it back. Can I make a guess that you're probably making this disposal in order to manage your residual value risk, especially in relation to the fact that the environmental rules like the EEXI and CII are going to affect the steam turbine carriers a little bit more? And given that you're going to complete this in the fourth quarter, could I also understand if you're going to make a gain on disposal?

Yes. I mean based on the accounting, it is going to be more or less breakeven based on the book value. This is basically our strategy to monetize some of our assets and redeploy the capital to some of the growth areas.

Okay. Is Nissen Kaiun buying a steam turbine carrier? Or are they buying XDF? Or are they buying the [ DPDF ]?

The steam vessel.

Okay. Okay. Captain, I don't know why you're smiling, but it's a genuine question.

You're trying to hone in, in terms of which is the asset, right, which we have not named. And you're exactly right. One of the facts we're taking into consideration is definitely the residual value risk for the asset. And management has just to be responsible in managing that.

Okay. Sure. what's the attraction for them then? Because everybody knows that these technology is legacy, and it's falling out of favor. What's the attraction to the buyer?

I mean as far as a buyer is concerned, I mean, if you've done your research on Nissen Kaiun, they're not small. They're not a small player in Japan. The attraction has also been wanting to partner with a reputable partner like ourselves in LNG space and also taking positions in LNG carriers. In terms of the residual value risk appetite, we can say what is the appetite and if there's any other future conversion that we are looking at, et cetera, which is information that we do not have. But at the end of the day, it's a credible partner. It is not a partner that has not -- we have not partnered before. It is a partner that we have partnered previously in our container vessel space a very long time ago. So it is reestablishing that partnership. In terms of exactly why they are coming into this space, et cetera, we have a general idea, but that's about all that we need.

So was this transaction initiated by them or by MISC?

The proposal came from them.

Okay. Okay. That's interesting. All right. Anyway, we'll talk more about this the next time we meet. But the FSU [ Lucas ], the 2 FSU [ Lucas ], I noticed that you still have on your vessel list. So is it still contributing charter hire to your P&L this quarter? And when exactly will it be transferred over to Petronas Gas?